Product Policy; New Product Development

Key Terms: convenience, shopping, specialty goods, unsought goods, product life cycle, introduction, growth, maturity, decline, penetration vs. skimming pricing, positioning , sick products, pruning the product line, ethnic marketing, brand, brand name, brand mark, trademark, battle of the brands, private label, brand extension, line extension, product manager, category manager, idea generation, screening, business analysis, concept test, product test, market test, simulated test market, organizational buyer, reciprocity, B2B, installations, accessory equipment, fabricated parts and materials, raw materials, and supplies.

Please note that sometimes the word "product" is used to mean brand and sometimes it refers to the generic product.

The classification of consumer goods was discussed previously but I feel that it is necessary to review this in order to understand distribution.

Convenience goods— These are goods that consumers want to acquire with virtually no shopping effort. They include: staples (milk, bread), impulse items (candy, gum, soda, magazine), and emergency goods (ambulance, tow truck).

Shopping goods—Customers tend to shop around, i.e., make price and/or quality comparisons. Examples of shopping goods: computer, suit, coat, printer, sofa, and bedroom set.

Specialty goods –Customers are willing to make an extended search to find these goods. In some cases, a customer might be willing to travel 20 or 30 miles to find them. Some examples: wedding dress; Rolls Royce; a special stamp if you are a stamp collector; an exotic camera if you are a photography buff.

Convenience goods need intensive distribution. Your product has to be in millions of outlets. Think of how many places you can purchase a newspaper or a cup of coffee. Shopping goods require selective distribution and specialty goods require exclusive distribution.

Product Life Cycle Theory (This is a theory dealing with generic products, not brands.)

Introduction: Firms have to decide whether to use penetration pricing or skimming (skim-the-cream) pricing. A penetration price is a low price. This is usually done in order to keep the competition out. A skimming price is a high price and this enables the company to recoup its investment much sooner since many innovators are willing to pay a very high price for a new product in order to be first. After many of the innovators have paid the high price, you then lower the price. In this stage, ads try to build up primary (generic) demand for the product, not selective demand for the brand. Ads are more informative and attempt to explain why one should buy the product (relative advantage). Promotional expenditures are high since you are trying to induce trial. You do not begin to make profits until the end of this stage. Distribution is limited and you have few models from which to choose.

Growth: Sales are growing rapidly. Profits tend to peak during this stage. Many firms attempt to enter the industry during this stage. Customers have more models to choose from and there are major product improvements. Competition causes prices to drop. Advertising tends to stress selective demand, i.e., demand for the brand, not primary demand.

Maturity: Market shares become fairly stable, the product's sales growth slows down, and only a few major firms are left in the industry (oligopoly). Prices are now close to costs. Firms compete on the basis of price or sometimes will use advertising to stress emotional appeals. This may be necessary since there are few real differences among brands. Notice that the difference among cigarette brands, for example, is more emotional than actual. For firms to enter a new growth phase, it is necessary to come up with new uses or to constantly innovate and add exciting new features to the product. The maturity stage is usually the longest stage in terms of time.

Most products are in the maturity stage of the product life cycle.   It is important to be proactive and come up with ways to extend the product life cycle.  This can be accomplished by:
(a) modifying the market -- find new users for the product.  
(b) modifying the product -- change a product feature to attract new users
(c) modify the marketing mix -- change one of the marketing mix elements, e.g., price or the way the product is promoted.

Look at how Arm and Hammer keeps coming up with new uses for its baking soda (e.g., deodorant for one's refrigerator). This is important since very few people have time to bake.  Do you know what has been the biggest problem for aluminum foil?  Takeout foods!   If people do not cook, they do not need aluminum foil.  This is one reason that Reynolds has modified its product so that it foods such as cake frosting and melted cheese will not stick to it.  

Decline: Sales for the product category begin to fall. There are fewer firms in the industry and fewer brands to choose from. Very little is being spent on promotion, and distribution is rather limited. Products in the decline stage include: typewriters, cloth diapers, 35 mm cameras, black and white television sets, color television sets, VCR, and cassette players.

Some textbooks claim that the new product failure rate is 80%. This number is not necessarily accurate. Failure is defined differently by different researchers. Furthermore, it depends on the type of product (consumer or industrial).

Major reasons for failure of new products (i.e., brands):
Conference Board Study — Inadequate market analysis
Angelus Study — Inadequate market research
Study by Buzzel and Nourse — Misjudged marketing conditions
Harvard Business Review study — Most failures are products that offer no price or performance advantage

Bottom line: most failures are due to marketing mistakes.

In fact, some failures are due to poor product positioning. The way a product is positioned can affect its sales. Remember that positioning has to do with how you want the product perceived either on its own and/or relative to the competing brands in the market. When 7-Up was positioned as an "uncola" sales rose dramatically. The public was told that it was an alternative to cola soft drinks and it was not just a mixer to be used with scotch. Positioning Tang as an orange juice limited its market. It is mainly consumed in the morning as an alternative to fresh OJ or concentrate. An alternative way to position it might have been as a soft drink. It is certainly easier to carry home a jar of Tang than several bottles of soda. Perrier has been positioned as an alternative to soft drinks and alcoholic beverages, not as a substitute for tap water. Note that it does not come in gallon containers. The Perrier bottle looks like a soft drink bottle and the price is much higher than waters such as Poland Spring.

Sick Products—Sometimes existing brands get old and sick.  Companies have to consider pruning the product line. Gardeners prune their rose bushes by cutting off the dying branches.  Marketers also have to look at all their brands and decide which need to be pruned.   This means eliminating the sick brands, i.e., brands that do not have a future and waste a great deal of management time.  Even in academe, departments have to prune their course offerings.  Courses can become obsolete and stale.  A dynamic, successful department is always examining and modifying its curriculum.

How to spot a sick product:
Sales trend is down, price trend is down, profit trend is down, and/or it uses up too much managerial time.

What to do? Some possibilities:

1. Delete the product as soon as possible.
Considerations in dropping the product:
(a) Effects on customers who expect service and replacement parts.
(b) Effects on employees if you fire the workers making the product.
(c) Effect on other products in the product line. For example, if GE were to discontinue selling dryers, this might have an adverse effect on washing machines.

2. Sell the product to another company.

3. Revise your marketing strategy. You might turn the brand into a discount brand which means sell it for a very low price and minimize your promotional expenses. This was done to Pepsodent toothpaste and Lux soap. You might try to find a new target market and/or modernize the brand by giving it a new package.

4. You might eliminate the product gradually and milk it for remaining profits. The way to do this is to eliminate all marketing support (no advertising or sales promotions such as couponing) and continue to sell it.

According to Business Week (June 14, 2004, pp. 54-56), Pepsi adds more than 200 product variations every year.  Pepsi is not obsessed with protecting the market share of its flagship brands (Pepsi and Lay's potato chips) but is concerned with "understanding and catering to changing tastes."  The company believes that consumers are looking for innovation.  Here are some examples of how Pepsi has dealt with changes in consumer taste:

(a) There is a growing market for New Age beverages-- Pepsi acquired SoBe Beverages and has used brand extensions to add such products as SoBe No Fear (energy drink), SoBe Synergy (50% juice targeted to school-aged children), and SoBe Fuerte (Hispanic Market). Also introduced Propel Fitness Water (flavored, vitamin-enhanced water).

(b) For those concerned with obesity-- Frito-Lay offers low-fat chips and is developing low-carb Doritos, Cheetos, and Tostitos.

(c) For those concerns with health -- natural and organic chips.

(d) For the huge Hispanic market-- Company brought four popular brands from a Mexican subsidiary (e.g., Sabritones Chile and Lime puffed wheat snacks).  There was a Fear that these brands might CANNIBALIZE existing US brands.  The company, therefore, limited distribution of the products to mom-and-pop bodegas in Mexican-dominated neighborhoods. Since these new brands were positioned as ethnic specialty not a line extension of Frito-Lay and were therefore able to get more shelf space. Please note that this is a good example of ETHNIC MARKETING.

The Pepsi Cola Company  has defined its COMPANY MISSION as serving customers, not as protecting flagship brands.  Is this a good idea?  Yes!  This is one way of ensuring that a company's products  have little appeal to young people and only appeal to older consumers.

A word about Ethnic Marketing-- I am sure that you have all noticed that Brooklyn (and Brooklyn College) is not a proverbial melting pot, but is a "salad bowl"  consisting of many different ethnic groups with distinct identities (Russian, Caribbean, Italian, Jewish, Chinese, Polish, Puerto Rican, Ukrainian, African-American, etc.).  We all share core American values but we still are proud of our backgrounds. A savvy marketer knows that there are different subcultures within the United States and Americans are not monolithic.  Ethnic marketing is about understanding the culture of various ethnic groups and marketing in a special way to them.  

Brands and Trademarks:

A brand consists of a brand name and a brand mark. The brand name can be vocalized (e.g., Coke) and the brand mark can be recognized (e.g., the Playboy bunny, Dreyfus lion, and the Nike logo). Trademark means that the brand name or mark has legal protection and has been registered. The Lanham act (1946) specifies what type of names or marks can be registered. Generic names cannot be registered.

Some names that started out as trademarks and are now generic include: aspirin, corn flakes, zipper, nylon, kerosene, gold card, and escalator.

Brand names that are not generic: Xerox, Kleenex, Formica, Scotch tape, Jello, Coke, and Vaseline. The public may use these registered brand names in a generic sense but they are still protected trademarks. The correct generic terms are: photocopy, tissue, wood laminate, gelatin dessert, cola soft drink, and petroleum jelly, respectively.

1. Give each brand its own individual brand name – Procter and Gamble used to do this. Some of their successful brand names: Tide, Ivory, Pampers, Bounty, Jif, Crest, Pert, Crisco, Oil of Olay, Pringles, Charmin, and Scope.

2. Blanket family name for all products (family brand) – GE uses the GE name on everything from bulbs to washing machines.

3. Separate family name for different product lines – Sears uses names such as Craftsman and Kenmore.

4. Company name plus individual brand name – Kellogg’s Rice Krispies. This might give you the advantages of the individual brand name and the family name.

The advantages of using individual brand names:
(a) If one brand fails, other brands are not hurt.
(b) This is necessary when you have incompatible products (Clorox makes bleach and Hidden Valley Ranch Dressings; Ralston makes dog food and cereal).
(c) Necessary when products have very different target markets (Gallo makes Andre champagne and Bartles and Jaymes wine coolers. Also, if a company wants to sell brands of different quality levels.
(d) This is one way to keep the competition from getting shelf space.

Disadvantage: It is very costly to promote many different brands. It is much easier to promote one brand. For example, GE promotes the General Electric name and helps all of its brands. Of course, if one product is bad, it can have a negative effect on other GE brands.

This refers to the battle between distributor brands which are also called private label brands (e.g., Shop Rite cola or Pathmark mayonnaise) and manufacturer brands (e.g., Coca Cola, Hellman’s, or Heinz). More than 18% of a supermarket’s volume is in private labels.

Line Extension – Take a successful brand name and use it in the same product category. For instance, Coke introduced Diet Coke; Pepsi introduced Pepsi One.

Brand Extension – Take brand name from one product category and move it into a totally different category (Arm and Hammer baking soda to Arm and Hammer toothpaste).

The product manager is assigned to a brand (or product) and is responsible for planning, establishing objectives, developing a marketing strategy, and ensuring that plans are properly executed. Problem: product managers have a great deal of responsibility and little authority. After all, a big company may have dozens of brands. All the product managers in the firm have to work with the sales force, advertising department, and marketing research department. Some firms have category managers who are responsible for managing the product categories. Problem: sometimes the product managers within the same company compete with each other  vigorously to increase market share (e.g., Tide vs. Cheer) and do not work as hard to wrest market share from brands belonging to other companies. The job of the category manager is to try to give each brand made by the same company in the same category a distinct position and try to ensure that they do not compete with each other.

(1) Idea Generation

Ideas for new products can come from the company’s own research and development department, customers, competition, employees, sales people, independent inventors, and top management. One reason for conducting focus groups with customers is to hear about their problems with products and get ideas for new products. Top managers sometimes get together for brainstorming sessions in order to come up with ideas for new products. New product development starts with idea generation it is therefore very important to teach mangers (the source for many ideas) to become creative thinkers.

(2) Screening

In this stage, ideas that are not technologically feasible or economically feasible are eliminated. Some ideas are eliminated because they do not fit the company’s mission or objectives.

(3) Business Analysis

Techniques taught in finance such as the Net Present Value (NPV) method and breakeven analysis are used to determine whether the idea has the potential of making any money. You have to consider how much has to be invested in the idea to turn it into a viable product, the size of the potential market, and what kind of cash inflows can be expected from the product.

(4) Concept Testing

A concept test is used to test the idea of the product. Prospects are shown a drawing of the proposed product with a description which includes the price and advantages/disadvantages of the proposed product. Prospects are asked whether they would buy the product. Some firms use virtual reality for testing during the concept testing stage.

(5) Product Test

A sample of consumers try the product in their homes for several weeks and are then asked whether they would buy it. In the computer field, beta testing of software is a type of product test.

(6) Market Test.  There are two major kinds of test markets:

Conventional (traditional) test market – The product is introduced in small cities that represent the United States. Some popular cities for test marketing include: Buffalo, Syracuse, Seattle, Dallas, Erie, Portland, Sacramento, Dubuque, Dayton, and Peoria. Most test markets are conducted in two or three cities and last about ten months or so. One additional purpose of the test market is to test various marketing strategies (e.g., different ways of positioning a product). One thing you want to see is the trial rate (the percentage of people trying the new product) and the repurchase rate (what percentage buy it a second time). One danger of a test market is that the competition can steal your ideas by monitoring the results of your test market.

Simulated test market (STM) – An STM is conducted by a research firm and there is total confidentiality. STMs are sometimes conducted in shopping malls. Consumers are invited to evaluate new television programs. Of course, the television programs include commercials; at least one of the commercials is for the product being test marketed. Consumers are then invited to "shop" in a room that is set up to look like a supermarket. Those consumers who purchase the product being tested will be called several days later and asked whether they would purchase the product again. One problem with a STM is that it cannot be used to predict trade response (the reaction of wholesalers and retailers to the new product). A simulated test market is far less expensive than a conventional test market.

(7) Review and Revision

The results of the above are studied by management and a marketing strategy is determined.

(8) Commercialization

The new product is introduced.


ORGANIZATIONAL BUYER

When businesses sell to other business (B2B), they often deal with an organizational buyer. An organizational buyer works for a company or organization and is paid to make the purchase. For instance, an organizational buyer might work for a retailer and buy products (e.g., dresses or sweaters) that will be resold to consumers. Manufacturer's buy goods (e.g., steel, glass, plastic) to make into products (e.g., car).

Organizational buyers tend to focus more on economic factors such as performance, quality, price, service, and reputation of seller when making the purchase. They might also consider such factors as dealing with multiple sources. It may not be a good idea to only buy a crucial part or product from only one company. What happens if the company goes bankrupt, or if there is a strike? It is good to deal with several firms, especially with respect to critical components or products. Another consideration might be reciprocity. This means that you might prefer buying from companies that buy from you. For instance, a steel company might feel obliged to purchase cars and trucks from automobile companies that buy steel from them.

Organizational buyers tend to be less emotional than consumers when buying. However, there may be considerations other than purchasing the product that is best for the organization. Sometimes, buyers are given "gifts" and bribes to influence them. Many organizations have strict rules about what kind of gifts are acceptable. In fact, some do not allow buyers to accept anything. This is necessary to ensure that the buyer remains objective and purchases the best products at the lowest price.

It should be noted that today much of the routine buying is done by computer. Many buyers use the Web to find the cheapest source.

Consumer goods, as noted above, are classified as convenience, shopping and specialty goods. This classification does not make much sense with industrial goods that are sold business to business (B2B).

Characteristics of Industrial Goods:

(1) Installations -- [These are similar to specialty goods]. Installations are capital equipment with a long life and they tend to be very expensive. This is the reason that they are normally sold directly from one company to another without using intermediaries. Service is very important and negotiations can be quite long. Examples: factory, power plant, jets, railroad cars, steel mill, buses, etc. When the Transit Authority purchases a billion dollars worth of buses, they negotiate directly with manufacturers.

(2) Accessory Equipment -- These are capital equipment with a much shorter life than installations. They are also not that expensive. Since it is not a major decision, they are purchased via wholesalers or through the Web. Examples: personal computers, fax machines, desks, etc.

(3) Fabricated Parts and Materials -- These are finished goods made by one company that become part of another company's final product. Examples: batteries and tires for car, batteries for toys, software for computers, etc. The company that buys these needs to ensure that they will receive a continuous supply of uniform, high quality fabricated parts. Note all the problems that Ford is having because of the Firestone tires. If you purchase a camera or watch you will be very upset if the battery in it does not work. Fabricated parts are often purchased directly from the supplier on a conntractual basis for a long time, i.e., three-year contract to supply batteries for XYZ cameras.

(4) Raw Materials -- These include farm products (wheat, barley, corn, etc.) and natural products (coal, iron, oil, aluminum, etc.). These products are used in manufacturing the finished product (e.g., cereal, automobile). Most raw materials are graded and sold in the commodity markets. You can check the price of all kinds of commodities such as gold, silver, wheat, oil, etc. Sometimes wholesalers are used when buying raw materials from foreign markets.

(5) Supplies -- [These are similar to convenience goods]. Supplies include maintenance items (bulbs, floor cleaner, liquid soap, etc.) and office supplies (paper, pens, markers, etc.). These are routine purchases and are often bought on the Web.

B2B selling has been greatly affected by the Internet. The B2B Marketplace or exchange brings corporate buyers and sellers in many different industries together. Check out http://www.freemarkets.com and learn about B2B online auctions.

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(c) 2007 H.H. Friedman